After the New Economy

by Kieran Healy on January 27, 2004

This week at Crooked Timber, at the suggestion of Daniel, some of us will be discussing Doug Henwood’s new book, After the New Economy. It’s an analysis and critique of “New Economy” rhetoric about productivity growth, the transformation of work and the process of globalization. Doug Henwood is probably known to many readers of CT. He’s the editor of the Left Business Observer and the author of Wall Street.

I read the book on a round-trip bus excursion to Sydney last week and wrote up a general review to kick things off. This is a fairly long post. You can get it in a more readable PDF format if you like.

After the New Economy, by Doug Henwood, is a timely book in the best tradition of broad-minded, trenchant and critical commentary on economic life. In the United States, writing of this sort is uncommon, in part because of the highly professionalized nature of economics as a discipline. Commentators on the economy have to work hard to establish their legitimacy and, justly or not, are often quickly dismissed as “economically illiterate” or “ignorant of Economics 101” by accredited economists, who guard their turf fiercely. Even paid-up members of the AEA can find their credibility questioned when they venture into the public sphere, as Paul Krugman and Joseph Stiglitz have discovered in the past few years. Scrutiny is stricter when the message is unorthodox. This makes Henwood a rare fish—a writer whose economic analysis is both well worth reading and (sometimes grudgingly) acknowledged by the gate-keepers as well-informed.

The conventional wisdom of the late 1990s was that the New Economy was an unprecedented miracle about to transform us forever. The conventional wisdom after the party ended and the recession and scandals began was that it had all been “a mix of collective folly and outright criminality.” Henwood insists it was neither. From the first page he argues that the New Economy circus emerged “from the innards of the American economic machinery,” as something that capitalism brought forth from within itself, and not for the first time. Though he doesn’t say it directly, he also wants to get across the idea that, in Marx’s phrase, “Capital is a social relation of production.” This is just the conviction that—exotic financial instruments, global capital flows and the complexity of modern market economies notwithstanding—the world of money is rooted in concrete social relationships between people. A capitalist market economy is not a neutral system governed by immutable laws of nature. Rather, even the powerful forces of supply and demand work within institutional contexts and cultural conventions. More than simply distortions or impediments to the workings of the economy, these contexts help constitute what the market is, and play a vital role in deciding how the social product is distributed, who gets exposed to the risks of economic life, and what positions are available within the social structure. There is substantial room for political choice—and political conflict—on each of these dimensions.

The best way to bring out this point is to take a comparative approach. The first three chapters of After The New Economy take the tenets of ’90s rhetoric and confront them with evidence first from official data about the U.S. and then from studies of other countries. The trends in real wages, poverty rates and the occupational structure go a long way towards deflating the grandiose claims of unprecedented economic transformation that were thrown around in the late ’90s. The biggest changes have all been in the direction of greatly increasing inequality in the distribution of income and wealth, to a degree not seen since the late 1920s. Growth in the middle of the income distribution has stagnated. From 1973 to the late 1990s, the only income group that did not experience a decline in real wages was the 90th percentile of the distribution and above. Those in the lower half of the income distribution had the hardest time. Martina Morris and Bruce Western (1999, 628) summarize the broad trends and the explanatory challenges they bring:

The key finding, however, is that earnings inequality has been growing among virtually all groups. Even among white men employed full-time, year-round, the group that has traditionally enjoyed the highest wages, most generous benefits, and greatest protection from cyclical downturns, the trends of wage stagnation and polarization have been marked. This leads to a set of research questions that breaks out of the usual “wage-gap” framework and begins to address the general issue of changes in labor market dynamics.

The chapters on Work and Income are largely descriptive, but well worth reading as they incorporate a lot of material that doesn’t get discussed much in the U.S. context. There’s a good discussion of the relatively low income mobility of families. Henwood also presents data from the Luxembourg Incomes Study showing that the U.S. has the smallest middle class and largest proportion of poor people of any of the advanced capitalist democracies. (This excludes Russia: others are welcome to make the case that Russia is a functioning capitalist democracy.) Now that the tremendous polarization of income and wealth is incontestable, “inequality optimists” often claim that the supposedly high rates of mobility in the U.S. make the issue moot. Drawing on Peter Gottschalk’s work, Henwood offers a vigorous rebuttal of Cox and Alm (1999), a common source for claims that American society is highly mobile.

A second line of argument in these chapters focuses on the rapid increase in measured productivity since the late 1990s, which has widely been supposed to be the (much-delayed) payoff from improvements in information technology. Henwood argues that this increase is largely explained by large changes within high-tech sector that are not reflected in other industries. He is also skeptical of the productivity numbers themselves: the value and productivity of computers and other bits of information technology is very difficult to measure. The appropriateness of the “hedonic pricing” methods used in official statistics is a difficult question that I am not in a position to answer here. But confidence in the numbers is partly a function of one’s belief that markets behave more or less according to neoclassical ideals. There is an analogy to the labor market: if you believe at the outset that wage rates reflect the marginal productivity of workers, then you will likely believe that systematic differences in pay are due to differences in skill rather than, say, employer discrimination. Similarly, a priori confidence in the rationality of managers and the discipline of market competition will make you more likely to accept the many statistical compromises that have to be made when quantifying the contribution to productivity of a new Dell with Microsoft Office installed.

A different way to approach the question of skills and information technology is via change in the occupational structure. Occupational shifts are easier to measure than productivity. Henwood shows that very few of the fastest-growing occupations during the 1990s were the kind of exciting, autonomous, “frictionless” info-tech jobs that were supposed to be in everyone’s future. He criticizes a typical example from the 1990s, Robert Reich’s (1991) claim that knowledge-intensive occupations staffed by “symbolic analysts” were the hot new trend. Henwood has little trouble showing that, although some cool new occupational positions undoubtedly exist, the fastest growing categories do not fit the New Economy image. They include food preparation and food service workers, computer support specialists, office clerks, truck drivers, nurses and nursing aides. Some of these jobs do involve intensive use of computers, but usually not in the ways suggested by the phrase “symbolic analyst.”

Speculation about the macro-sociological consequences of new technology is not new. Daniel Bell’s work on the rise of Post-Industrial society (Bell 1973) is an example from thirty years ago. Writing right at the transition away from the “golden age” of post-war capitalism, Bell argued that a new kind of society was emerging based on the increasing centrality of theoretical knowledge to the economy, the growth of a “knowledge class” of scientists and engineers, and a move from manufacturing to services. The rapid diffusion of computers in business and then homes from the ’70s onward led the negative label of “post-industrial” to be replaced by a positive one, the “information society.” Management guru Peter Drucker coined the term “knowledge worker” even earlier than Bell, in the 1960s, describing much the same set of occupations as Bell identified with post-industrialism. Reich’s symbolic analysts can be seen as the next waypoint in this conceptual migration. The latest move, coincident with talk about the New Economy, has been an emphasis on intellectual capital, flexibility, knowledge and skill under the concept of the “creative worker.”

Richard Florida’s The Rise of the Creative Class (2002) is a recent, bestselling version of this thesis. Florida argues that U.S. society now stratifies into four main occupational groups: the agricultural, working, service and creative classes. The creative class includes a “super-creative core” of “people in science and engineering, architecture and design, education, arts, music, and entertainment …[whose] job is to create new ideas, new technology and/or new creative content”. Besides these occupations, the creative class also includes “a broader group of creative professionals in business and finance, law, health care and related fields. These people engage in complex problem solving that involves a great deal of independent judgment and requires high levels of education or human capital” (Florida 2002, 8). Florida’s creative class com- prises about 30% of the workforce. About 12% of workers are in his “super creative core”.

Florida uses Standard Occupational Classification (SOC) codes to derive the classes. The super-creative core includes all computer and mathematical occupations, for instance. Some of the occupations in this group—ones with many workers in them—can only be tendentiously classed as “super creative.” For instance, SOC code 15-1041 is “Computer Support Specialists.” Unlike the many food service, retail and care-related occupations (such as orderlies and home care aides) that have been on the rise, tech support is right in the IT sector. And in comparison to picking strawberries or flipping burgers, it’s not a bad job. But it’s not very creative, either, as you mechanically navigate a tree of questions to isolate problems and then read out the pre-written answers. The work of writing software is often not much better. While computer programming is often thought of (usually by people over 50) as high-tech, interesting work, nerd culture is full of terms expressing anxiety about monotonous and deskilled programming jobs. It’s not much fun being a code monkey in a cube farm (Daisey 2002).

Henwood follows up his survey of these trends with a discussion of the debate on globalization. This chapter is quite different from the others in the book, as it is less a summary of what we know about the global economy and more a rearguard action against various wings of the anticapitalist movement that Henwood disagrees with. Like all good Marxists, Henwood has a clear-eyed appreciation of the real and potential benefits of capitalist markets, and no wish to revert to what Marx called “the idiocy of rural life,” and all the back-breaking drudgery that it entails. So he has little time for “de-linking” from the economy or bucolic communitarian utopias or self-imposed cultural isolation. The main targets of this chapter are Ralph Nader (“a man who seems proud of his (locally produced) hair shirt”), the Malthusian enthusiasms of Deep Ecologists, ecofeminist Vandana Shiva and activists David Korten and Kirkpatrick Sale. Henwood is particularly irritated by their attitude to culture:

Who needs literacy, really, wonders Sale, when what we’re reading is of little “merit”? Civilization, says Sale, is a “catastrophe,” and he longs for its “collapse.” This is snobbery, elitism and despair masquerading as radical critique.

Henwood’s view of the cultural and economic benefits of a global culture is much closer to Tyler Cowen’s (2002) than these globetrotting antiglobalists. On the other hand, he has plenty of critical things to say about the culture of capitalism. In his discussion of capital markets in the following chapter, he complains that

the cultural elasticity of profit isn’t what it used to be. Shakespeare died rich, said Keynes, the beneficiary of one of the great bull markets of all time, the greatest the world had seen before the American 1920s. The American 1980s and 1990s were a massive bull move; we got “Friends.”

There’s no contradiction here: you can think Friends is a waste without believing the solution is the abandonment of literacy. He makes similar distinctions throughout in the book. Henwood derides “the nationalist fantasies of antiglobalizers,” for example, but favors a strong role for the state in governing the market. One of the main tasks of the book is to remind American readers that a polarizing, unfettered market and authoritarian central planning are not the only choices available. People need reminding of this in a public sphere where many commentators insist that the domestic branch of the U.S. state is the epitome of “big government.”

The American state has expanded a great deal in one area since the 1970s: Prisons. The rise in rates of incarceration, particularly amongst unskilled black men, has largely been a consequence of changes in sentencing policy rather than crime rates and has had a significant effect on patterns of employment, as prisoners are taken out of the job market in the short term (and not counted as unemployed) and ex-convicts find it much harder to find work in the long term (Western 2002). In the United States, the prison system is a significant labor market institution in a way unknown in any other advanced capitalist democracy. Differences in unemployment rates often ascribed to European labor market rigidities appear much smaller when the prison popu- lation is taken into account (Western and Beckett 2000). Henwood mentions the prison system only twice, and it’s a pity he did not have the space or inclination to discuss it further. In many ways it’s exactly the kind of transformation in the structure of economic institutions that the book is all about.

The brief conclusion of the book brings out a theme that pops up occasionally in the earlier chapters. At times, Henwood writes like a straightforward social democrat, arguing for strong welfare provisions and a stable bargain over wages and profits. (“There’s no great mystery to making the poor less miserable and the middle more secure. You start with unions, add vigorous antidiscrimination programs, and finish with a civilized welfare state.”) Elsewhere, he’s happy to use the language of class warfare when describing the increasingly important role of the Federal Reserve from Paul Volcker’s tenure onward. (Incidentally, this post doesn’t address Henwood’s discussion of political economy of finance—I’ll leave that to other Timberites.) But by and large he confines his own general aspirations for a better world to throwaway lines here and there. We’ve already seen that he has no time for the anti-developmentalist utopias of some anti-globalization activists. He also slams “theoryheads,” especially ex-Marxists like Manuel Castells (1996), for embracing the hype about the weightless, information driven society of the future. Mainstream economists—the “professional optimists”—are too willing to believe in the benevolence of the market and the wonders of the productivity boom. And of course the whole book is an attack on New Economy talk in general, particularly in the business press and from ideologues like George Gilder. So, in one sense, the book is an exercise in pouring cold water on utopias, wherever Henwood finds them. But it’s also an effort to reclaim that language for the left. Why, he asks, “did The System’s publicists need the utopian story?”

If all challenges to capitalism were dead, why did we hear so much about democratization and the overturning of hierarchy? …Fine. If a little hierarchy-overturning economic democratization is such a good thing, then why not more?

The reason that Henwood hates New Economy talk so much is that its market populism is ersatz anarcho-socialism. The democratization of ownership through shareholding, the proliferation of fulfilling, creative work directed by autonomous workers, the elimination of corporate hierarchies, and above all the transcendence of the material world of production through the power of technology: this is Marx’s dream filtered through the pages of Business Week magazine. This connection, ironically, might help readers who are otherwise allergic to the language of class conflict to see why Henwood’s exposure of the New Economy’s empty rhetoric is on target.

Bibliography

Bell, Daniel. 1973. The Coming of Post-Industrial Society: A venture in social forecasting . New York: Basic Books.
Castells, Manuel. 1996. The Rise of the Network Society . Oxford: Basil Blackwell.
Cowen, Tyler. 2002. Creative Destruction: How Globalization is Changing the World’s Cultures. Princeton, NJ: Princeton University Press.
Cox, W. Michael and Richard Alm. 1999. Myths of Rich and Poor: Why we’re better off than we think . New York: Free Press.
Daisey, Mike. 2002. 21 Dog Years: Doing Time @ Amazon.com. New York: Simon and Schuster.
Florida, Richard. 2002. The Rise of the Creative Class. New York: Basic Books.
Henwood, Doug. 2003. After the New Economy. New York: New Press.
Morris, Martina and Bruce Western. 1999. “Inequality in Earnings at the Close of the Twentieth Century.” Annual Review of Sociology 25:623-57.
Reich, Robert. 1991. The Work of Nations: Preparing Ourselves for 21st-century Capitalism. New York: A. A. Knopf.
Western, Bruce. 2002. “The Impact of Incarceration on Wage Mobility and Inequality.” American Sociological Review 67:477-98.
Western, Bruce and Katherine Beckett. 2000. “How unregulated is the U.S. labor market? The penal system as a labor market institution.” American Journal of Sociology 104:1030-1060.

Kieran, a couple of comments: Florida isn’t worth spending two paragraphs on. Although the book got a lot of publicity, it ultimately made little impression on the political-economy debate as a whole, and those of us (to generalize wildly) who are more sympathetic to the New Economy thesis than Henwood have little patience for it. Florida is an easy target, but for that reason not especially useful.

More substantively, my major problem with Henwood’s book is his cavalier use of statistics, most particularly when it comes to change over time. You participate in this when you write, “From 1973 to the late 1990s, the only income group that did not experience a decline in real wages was the 90th percentile of the distribution and above.” The New Economy (assuming it existed) did not start until 1995 at the earliest. So saying that it wasn’t until the late 1990s that people in the income groups below the 90th percentile started to experience increases in real wages is not an argument against the New Economy. It’s an argument against the economy that existed before the New Economy did. There are certainly right-wingers who will tell you that the Reagan years were great for most Americans. But just about everyone I know who thinks something important changed about the American economy in the mid-1990s would assent to the fact that between 1973 and, say, 1996, the U.S. economy let most Americans down.

This is not a trivial point. Although Henwood titles his book “After the New Economy,” most of his critique of the performance of the U.S. economy concentrates on the period before the New Economy came into existence. As a result, it loses its efficacy as an attack on the 1995-2000 period. It has to, of course, because objectively speaking almost nothing happened during this stretch of time that a social democrat, at least, could be unhappy with. Real wages for most Americans rose for the first time in almost thirty years. We had what amounts to full employment. The income of the lowest quintile rose. And despite the absurdity (and obscenity) of executive compensation, the gap between the wealthy and everyone else did not widen. Now, it’s possible that this was an anomaly, a temporary blip in an ongoing narrative of capital’s domination. But it was the moment of the New Economy, and if one is going to attack it or critique it that’s what you have to deal with. Telling us what the U.S. economy was like between 1973 and the late 1990s doesn’t help. We know what we left behind. The question is, what was wrong with what we had between, say, 1995-2001?

Steve writes “my major problem with Henwood’s book is his cavalier use of statistics”

He’s got a point Kieran if it’s true that he writes: “…the rapid increase in measured productivity since the late 1990s, which has widely been supposed to be the (much-delayed) payoff from improvements in information technology. Henwood argues that this increase is largely explained by large changes within high-tech sector that are not reflected in other industries.”

That’s just wrong. The rapid increase in measured productivity is substantially down to a big increase in the productivity of rather low tech service industries, above all retailing (partially, but not only, thanks to new technology); what McKinsey called the Walmart effect.

Henwood makes one argument about the official productivity statistics, trying to isolate the source of the big increase in these numbers and expressing some skepticism about the measurement decisions. He then goes on to discuss the McKinsey study and the “Wal-Mart effect” (pp64-7 of the book) making much the same point you just did.

Steve Carr’s point bears repeating. If Henwood is really looking at 1973-2000 instead of 1992-2000, then he’s being at best foolish and at worst deliberately mendacious. Either way, he’s hugely missing the point.

Income inequality in the US _decreased_ during the 1990s, especially during the period 1995-2000. The effect was real, and it was robust — comparing the 10th to the 90th percentile, the 25th to the 75th, 50-90, you name it. Don’t take my word for it; go over to census.gov. You can practically eyeball it from the raw data.

To simplify a complex reality, the relentless onward march of inequality slowed to a creep after about 1992; stopped dead and even took a cautious step or two backwards between 1995 and 2000; and resumed as if nothing had happened in 2001.

As John says, that may just have been a blip in a long-term trend. (I suspect so, myself.) But if so, it was a pretty big blip, and deserves to be examined on its own terms.

Doug: Doug H does discuss this and presents the raw figures. But you’ve got to remember that these increases came about entirely as a result of changes in hours worked rather than an increase in the wage rate. So it doesn’t really fit into a productivity story.

I am glad to see someone has decided to try to rebut Cox & Alm; not that I find C&A’s book unpersuasive, but that it’s good to see someone of the left addressing their argument rather than just pretending it doesn’t exist. That said, anyone who says that “the U.S. has the smallest middle class and largest proportion of poor people of any of the advanced capitalist democracies” without mentioning that the U.S. legally admits more poor immigrants each year than all the other advanced capitalist democracies combined is being disingenuous. If the U.S. wanted to completely reverse trends towards income inequality tomorrow, it could do so by closing its borders. Somehow I doubt Henson would take that as a progressive measure, though.

It certainly is hard to figure out Henwood’s savaging of Manuel Castels, given that he is so taken by Hardt and Negri — talk about theories of weightlessness. One has to ask whether, in the final analysis, there is nothing ‘new’ about the ‘new economy,’ whether all the analysis which indicates a new centrality to knowledge/information in the economy is simply hype. Castels suffers from attempts to explain everything that is new under the sun, but it does not follow that there are not major structural changes in the forms of production at work, and that there are not some insights to those changes in his work.

I don’t understand the point about the “increases” (in people’s wages, I assume?) being due to changes in hours worked rather than changes in the wage rate. The avg. hourly “wage” (actually wages and salaries together) rose from $12.58 in 1996 to $15.18 in 2001. The ECI (which is an hourly measure) went from 102.3 in Q1 of 1995 to 107.4 in Q1 of 2001. Don’t these numbers mean that real wages per hour, as well as real wages in general, rose in the late 1990s?

The Morris/Western article that Kieran cites suffers from the same problem of ending the story just as it begins, since their data set ends in 1996. You can’t deflate grandiose claims of economic transformation by talking about what was happening before the transformation — if it happened — began.

As a non-economist trained in political science, I don’t see the case for 1995 being a magic year at which all our considerations must begin as all that obvious. Hell, Henwood has been writing the book since well before 1995. The arguments about a ‘new economy’ clearly pre-date 1995 as well. Most importantly, the trends that are connected with the term also clearly pre-date 1995. I might be convinced that 1995-2000 constituted a particularly important period for consideration when one looks at the question of the ‘new economy,’ but to say that discussions of data and trends before 1995 are discussions of matters that pre-date the ‘new economy’ seem to me to be the economists’ version of a semantic argument that simply defines the desired answer into the question being asked.

Looks like I have another “woops” moment. The source of the “fact” that were it not for immigrants, American income inequality trends would be reversed, is Gregg Easterbrook’s recent book “The Progress Paradox”. Easterbrook has now recanted that specific claim.

I guess I will have to reserve my reliance on Easterbrook’s writings solely to football.

“FYI, Contrary to a commenter, Henwood and Cockburn are not on good terms these days, judging by the former’s public remarks about the latter.”

Sorry, in the one issue of the LB Observer I read (about 4 years back), Henwood seemed full of praise for Counterpunch & Cockburn, which was enough to make me not want to read Henwood any longer. Glad to hear they’re not on speaking terms these days. Maybe I’ll give Henwood a second try.

Dsquared: Henwood does discuss this and presents the raw figures. But you’ve got to remember that these increases came about entirely as a result of changes in hours worked rather than an increase in the wage rate. So it doesn’t really fit into a productivity story.

Er… WTF?

Productivity rose sharply from 1995 to 2000. So did wages.

Total hours worked barely budged, though.

By “these increases” I assume you mean increases in wages? Well, then, no offense, but you’re wrong. Real wages _per hour_ rose by about 20% over that period — by far the biggest and longest sustained rise of the last 30 years.

And, as noted, that tide lifted all the boats; everybody gained, and the lower deciles actually gained a wee bit more.

So, again no offense, but your post seems to make no sense. Are we missing something>

1995 makes sense as a starting point for much the same reason 1973 does: enough inflection points in enough different time-series curves to really make you sit up and take notice.

Now, 1973 was the beginning of a huge long-term change; it represented a drop in sustained growth rates, in both the US and Europe, that dragged on for the next 20 years. 1995 seems to have been a hill rather than a mountain, as most of the numbers seemed to return to normal in 2001.

On the other hand, 1973 had a couple of obvious causes — the oil shock, poor monetary policies. 1995 remains somewhat mysterious. (Not that there’s any lack of explanations — just convincing ones.)

I think Doug’s explanation for “why 1995?” is a good one. And there is a concrete event that happened in 1995 that undoubtedly had something to do with the productivity boom, at least insofar as it was connected to business’ use of IT: that was the year semiconductors went from a three- to a two-year product cycle, which meant processing power got faster quicker and also that processors got cheaper, encouraging businesses to invest more in IT.

I think IT is only part of this story, and that although it was important it wasn’t sufficient. Regardless, it’s pretty clear something changed in 1995, just as something changed in 1973.

I’m not sure if it’s vulgar, embarrassing, or otherwise unpleasant to defend oneself against criticism of one’s own book, but I have no self-control anyway. I’d like to respond to two of the points:

1) “Cavalier” use of stats. Them’s fighting words, man. I’m obsessive about getting the numbers right and looking at them a minimum of thirteen different ways. I present graphs that make it easy for readers to periodize the data any way they’d like, and I also make the point that real wages did rise in the late 1990s across the distribution. As I say on p. 90, “There’s no doubt that the tight labor markets of the late 1990s did a lot to bring up the incomes of poor and working-class Americans – a welcome reversal after more than twenty years of decline.” Elsewhere I describe this as the fortunate byproduct of what turned out to be an unsustainable boom. I’d add now that it’s not enough to rely on tight labor markets to push wages up and poverty down – you need unions and friendly policies to make the gains sustainable.

Inequality most certainly did not decline in the 1990s, early, middle, late, or entire. Here’s the Census Bureau’s ginis:

And yes, hourly wages rose. But so did the work effort – more people worked. As I say often enough to risk boring myself, if we’re in a productivity revolution, we’re certainly not taking its dividends in the form of increased leisure.

2) In my review of the productivity stats, I say that everyone comes up with different numbers, often wildly different numbers. Thus Gordon and the BLS stats show durable goods as the star of the show; McKinsey nominates wholesale and retail trade. Triplett, Jorgenson, and Stiroh all concede that many heavy computer-using industries showed no acceleration in productivity.

And though my focus is on the late 1990s, I was trying to situate them in a much longer history – most immediately, the whole post-1979 “neoliberal” era, but less immediately, the ancient tendencies of American-style capitalism, on which the new economy moment was a manic variation.